Sunday, September 21, 2014

Is China Stalling?

Many countries grow well when poor. Some continue to grow through the middle-income ranges, and eventually become (fully) developed. Think South Korea. Others stall: think Brazil. The majority of countries hit that brick wall.

The problem in assessing how countries are going to do is to separate out two effects that are jumbled together: better marshaling of resources, and improved productivity.

Once you get those separated adequately, you come to the brick wall that most countries hit: once resources are marshaled efficiently, they cease to be an engine of growth.

So the key to whether or not a country eventually gets (fully) developed is its TFP (total factor productivity). This is a residual that isn’t easy to measure, but we really need to.

China’s 1% average annual growth in total factor productivity between 1978 and 2012 – a period when average per capita annual incomes rose from $2,000 to $8,000 — compares with 4% annual gains for Japan during its comparable 1950-1970 high-growth period, 3% for Taiwan from 1966-1990 and 2% for South Korea from 1966-1990, he said, when purchasing power in the relative economies is taken into account.

There really is no way to evaluate this other than to wait 20 years and check back on it. See you then.